Comprehensive presentation on Entry strategy through Liaison and Branch offie in India (Including the Taxation aspects)

1. Entry Strategies
Liaison office / Branch office
CA. Sudha G. Bhushan
Vccircle Training
Workshop on FEMA
18th Jan 2013 || 8th Feb 2013
Mumbai || Delhi

2. Contents
• Definition
• Regulatory Framework
• Registration requirement of Liaison Office/
Branch Office
• Annual Compliance Requirements
• Closure Requirements
• Repatriation of Funds
• Taxability

3. Liaison Office
Definition

4. Definition - Liaison Office (LO)
Defined in clause 2(e) of Notification No. FEMA
22 /2000-RB dated 3rd May 2000
• 'Liaison Office' means a place of business to act
as a channel of communication between the
principal place of business or Head Office by
whatever name called and entities in India but
which does not undertake any commercial
/trading/ industrial activity, directly or indirectly,
and maintains itself out of inward remittances
received from abroad through normal banking
channel;

5. Suitability
• Simple structure
• Preparatory step before commencing business in India
• Relatively easier and cheaper to set up,
• Easier to maintain and close down
• Less Compliances
• No tax as such

6. Permitted Activities by LO
 Representing the parent / group companies
 Promoting export/import from/to India
 Promoting technical/financial collaborations between
parent/group companies and companies in India.
 Acting as communication channel between the parent
company & Indian companies
 Any other as permitted by RBI

7. Restricted Activities for LO
• Trading;
• Entering into any contracts with Indian residents;
• Borrowing funds;
• No business should be carried on or revenue generated in
India;
• All the expenses for the set-up, operation and
maintenance of the Liaison office have to be met
out of foreign exchange remittances from the
foreign company;

8. Restrictions as per RBI letter
• Not to acquire, hold, transfer any property in India
without RBI prior approval
• Prior approval of RBI required before shifting of Liaison
office
• Shall not enter into contract in its own name
• Shall not borrow/lend any money from/to any person in
India without RBI prior permission

9. Continued…
• The office in India shall not render any consultancy or other services
directly/indirectly with or without consideration
• Shall not have signing /commitment powers except as required for
normal functioning of the office , on behalf of head office
• Not permitted to charge any commission or receive other income
from Indian customers for providing Liaison services

10. Branch office
Definition and Permitted activities

11. Definition – Branch Office (BO)
• As per Regulation of Notification No. FEMA 22 /2000-RB
dated 3rd May 2000 clause 2(c)'Branch' shall have the meaning
assigned to it in sub-section (9) of Section 2 of the Companies Act,
1956 ( 1 of 1956),

12. Definition under companies Act
 “branch office” in relation to a company means—
 any establishment described as a branch by the
company; or
 any establishment carrying on either the same or
substantially the same activity as that carried on
by the head office of the company; or
 any establishment engaged in any production,
processing or manufacture

13. Permitted Activities by Branch Office
• Export/Import of goods
• Rendering professional or consultancy services.
• Carrying out research work, in which the parent company is
engaged.
• Promoting technical or financial collaborations between Indian
companies and parent or overseas group company.

14. Contd…
• Rendering services in Information Technology and development of
software in India.
• Rendering technical support to the products supplied by
parent/group companies.
• Foreign airline/shipping company.
• Representing the parent company in India and acting as
buying/selling agent in India.

15. Restricted Activities for BO
• Prohibited from expanding its activities or undertake
any new trading, commercial or industrial activity other
than that expressly approved by RBI.
• Restricted from accepting deposits in India.

16. Regulatory Framework

17. RBI
Liasion
COMPANIES office/ FEMA
ACT, 1956 Branch
Office
INCOME
TAX ACT

18. Foreign Exchange
• Sub-section (6) of Section 6 of the Foreign Exchange
Management Act, Management Act, 1999
1999
• Foreign Exchange Management (Establishment in India of
Reserve Bank of branch or office or other place of business) Regulations,
India 2000
• Notification No. FEMA 22 /2000-RB dated 3rd May 2000
Companies Act • Section 591 to 602, both inclusive
• Section 9
Income Tax Act • DTAA

19. Reserve Bank of India
Regulation 5 of Notification no 22/2000 of FEMA dated 3 May 2000
• Prior approval of Reserve Bank of India (RBI) required
• Application to be made in form FNC1
• To obtain the Unique Identification Number (UIN)
• Approval generally granted in 3 weeks
• Permission for a period of three years and to be renewed thereafter.

20. Companies Act
• Section 591 to 602, both inclusive, shall apply to all foreign
companies, companies incorporated outside India which, have
established a place of business within India;
• Fifty percent of the paid up share capital of a company
incorporated outside India and having an established place of
business in India, is held by one or more citizens of India or
by one or more body corporate incorporated in India ,or by one or
more citizens of India and one or more body corporate incorporated
in India, whether singly or in the aggregate, such company shall
comply with such of the provisions of this Act as may be prescribed
with regard to the business carried on by it in India ,as if it were a
company incorporated in India.

21. Criteria of Eligibility

22. Government Route/RBI Route
Liaison office Branch office
• a profit making track record • a profit making track record
during the immediately during the immediately
preceding three financial years preceding five financial years
in the home country. in the home country.
• Net Worth [total of paid-up • not less than USD 100,000 or
capital and free reserves, less its equivalent.
intangible assets as per the
latest Audited Balance Sheet -
not less than USD 50,000 or
its equivalent.

23. Registration

24. Reserve Bank of India
When required
REGULATION 3 :- No person resident outside India shall,
without prior approval of the Reserve Bank, establish
in India a branch or a liaison office or a project office or any
other place of business by whatever name called

25. Documents required for RBI
• Form FNC
• Translated English version of the Company’s Certificate of
Incorporation/Registration, Memorandum & Articles of Association attested by the
Indian Embassy/Notary public in the country of registration (Two original copies)
• Copies of last three years audited Balance Sheet, Profit & Loss Account of the
applicant company/firm (five years incase of BO)
• Undertaking that the LO will not carry out any trading and commercial activity in
India.
• Copy of the Board resolution for opening office in India

26. Compliance

27. Compliance with RBI
• Annual Activity Certificates (AAC) from Chartered
Accountants
• Audited Balance sheet to the designated AD Category I
bank and a copy to the Directorate General of Income
Tax (International Taxation), New Delhi.
• Any other – as prescribed by RBI

28. A. P. (DIR Series) Circular No. 35 Dated 25 Sept 2012
• in addition to the reporting prescribed in terms of aforesaid circulars, all the new
entities setting up LO/BO/PO shall also:
▫ submit a report containing information within five working days of the
LO/BO/PO becoming functional to the Director General of Police (DGP) of the
state concerned in which LO/BO/PO has established its office; if there are more
than one office of such a foreign entity, in such cases to each of the DGP
concerned of the state where it has established office in India;
▫ a copy of the report shall also be filed with the DGP concerned on annual basis
along with a copy of the Annual Activity Certificate/Annual report required to be
submitted by LO/BO/PO concerned, as the case may be.
▫ A copy of report thus filed as above shall also be filed with AD by LO/BO/PO
concerned.

29. Difference
Liaison Office Branch Office
Can carry Business Activity
Cannot carry Business
Activity
Cannot take the loan and
advance
cannot take the loan and
advance
Can meet requirement
otherwise than by Foreign
Can meet requirement by Inward remittance
Foreign Inward remittance requirement
requirement only bringing
funds from outside India.

30. Acquisition of Immovable
property in india

31. • Regulated by Foreign Management (Acquisition
and transfer of Immovable property in India)
Regulations,2000
• FEMA notification no.21/2000 dated 3-05-2000

32. • Liaison office not to acquire any immovable
property in India
• Branch office can acquire immovable property in
India

33. Closure

34. Documents Required –RBI
• Copy of the letter of approval of Reserve Bank of
India for establishment of LO/BO in India.
• Board resolution of foreign/parent company duly
notarised/counslarized
• Power of attorney from foreign/parent company
duly notarised/counslarized in favour of person
signing documents for closure.
• Certificate by LO/BO on pending legal proceedings
in Indian courts or enquiries from Enforcement
Directorate.

35. Auditors certificate on computation of the
remittable amount and that there are
no unpaid liabilities as on closure date.
that there are no fixed assets owned by
the Branch office.
in lieu of no objection certificate from
Income Tax Department.
confirming that no proceeds accruing
from sources outside India has
remained un-repatriated to India.

36. …Closure Requirements – With RBI
 Certificate of LO/BO that it does not own
any immovable property in India.
 Certificate by LO/BO that it does not own
any deposits, loans and advances.
 An undertaking by LO/BO for remittance of
surplus to head office.

37. Remittance of profit or surplus

38. • Regulated by Foreign Exchange Management
(Remittance of Assets) Regulations, 2000.
• Regulation 6
• Application to RBI

39. Documents required
• a) Copy of the Reserve Bank’s permission for establishing the
branch/office in India
• b) certified copy of the audited balance-sheet and profit and loss account
for the relevant year;
• c) Auditors certificate certifying, -
▫ i) indicating the manner in which the remittable amount has been arrived and supported by a
statement of assets and liabilities of the applicant, and indicating the manner of disposal of
assets;
▫ ii)confirming that all liabilities in India including arrears of gratuity and other benefits to
employees etc. of the Liaison office have been either fully met or adequately provided for;
▫ iii) confirming that no income accruing from sources outside India (including proceeds of
exports) has remained unrepatriated to India;

40. Taxability

41. Liaison office Branch office
• Not taxable as not permitted to • Taxed at the rate at which
carry on any commercial foreign company are taxed in
activity in India*. India
• Required to file the Income • Required to file the Income
Tax return. Tax return.
* subject to further discussion

42. Business
• On the basis of Permitted business activities as
per the RBI regulation it is not allowed to carry
on any BUSINESS activity [trading, commercial
or industrial] in India
But needs independent examination from Income
tax perspective

43. Whether taxable?
• Section 2(13) Income Tax Act defines
business as “business includes any trade,
commerce or manufacture or any adventure
or concern in the nature of trade ,commerce
or manufacture

44. • The activity of the patent company are purely
commercial in nature
• Liaison office is not earning profit
It is assisting in earning profit for commercial
activity it is not necessary that every activity should
result in earning revenue

45. Taxability
• Section 4 • Charging Section of Income Tax
Act
• Section 5 • Scope of total income – Resident
/non resident
• Section 6 • Residence in India
• Section 9 • Income deemed to accrue or
arise in India

46. Taxability of Income
Resident Non resident
Ordinarily not ordinarily
Non resident
resident resident
accrues or
received or
all income from arises or is
deemed to be
whatever source deemed to
received in
derived which— accrue or arise
India
in India
the income which
received or accrues or accrues or arises to
accrues or him outside India not
deemed to be arises or
arises to him included unless
received in deemed to
outside India : derived from India
India accrue in India

47. Taxability- Non Resident
• Subject to the provisions of this Act, the total
income of any previous year of a person who is a
non-resident includes all income from whatever
source derived which—
(a) is received or is deemed to be received in
India in such year by or on behalf of such person
; or
(b) accrues or arises or is deemed to accrue or
arise to him in India during such year.

48. Section 6 factors
Determining
• Individual – Physical presence
• HUF, Firm, AOP – Non-Resident where Control and
Management of its affairs wholly outside India
• Others - Control and Management of its affairs wholly
outside India
• A company is said to be resident in India in any previous
year, if—
(i) it is an Indian company ; or
(ii) during that year, the control and management of its
affairs is situated wholly in India.
Company Non-resident if
foreign company or Control and
Management of its affairs is not
situated wholly in India

49. Section 9
• All income accruing or arising, whether directly
or indirectly, through or from any BUSINESS
CONNECTION in India, or through or from any
property in India, or through or from any asset
or source of income in India, or through the
transfer of a capital asset situate in India.

50. Business connection
• business connection” shall include any business activity carried out
through a person who, acting on behalf of the non-resident,—
(a)has and habitually exercises in India, an authority to conclude
contracts on behalf of the non-resident, unless his activities are limited
to the purchase of goods or merchandise for the non-resident; or
(b)has no such authority, but habitually maintains in India a stock of
goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the non-resident; or
(C)habitually secures orders in India, mainly or wholly for the non-
resident or for that non-resident and other non-residents controlling,
controlled by, or subject to the same common control, as that non-
resident

51. • Provided that such business connection shall
not include any business activity carried out
through a broker, general commission agent or
any other agent having an independent status, if
such broker, general commission agent or any
other agent having an independent status is
acting in the ordinary course of his business

52. Taxability - Liaison office
• As per Section 9(1)(i) of the Act, an LO would be
deemed to be liable to tax on its income in India
in case it constitutes a ‘business connection’ of
its foreign parent in India.

53. Continued…
• The taxability, if any, of LOs in India could be
said to be broadly governed by
▫ Section 9(1)(i) of the Income Tax Act, 1961 (Act),
▫ Double taxation avoidance agreement [DTAA]
where the foreign parent is from a country with
whom India has entered into a DTAA.
 Article 5 (on permanent establishment [PE]) read with
 Article 7 (on business profits)

54. Article 5 – Permanent establishment
• “permanent establishment” means a fixed place
of business through which the business of the
enterprise is wholly or partly carried on

55. Article 7- Business profits
• Business profit derived from other country
taxable in that other country only if the entity
has permanent establishment in that country

56. • As per Article 5 read with Article 7 of the
relevant DTAA, an LO would be taxable in India,
in case it constitutes a PE of its foreign parent in
India. Further, even if the LO is held to be a
‘business connection’/ PE of its foreign parent in
India, only so much of the profits as are
attributable to the operations carried out by the
LO in India, would be liable to tax in India.

57. Thanks
Taxpert Professionals Private Limited
sudha@taxpertpro.com
www.taxpertpro.com
09769134554 || 07738892291